“To Rome said Nero: ‘If to smoke you turn I shall not cease to fiddle while you burn.’” –Ambrose Bierce
For President Obama it has been a dismal year. He cannot claim victory on even a single one of his big four agendas: healthcare, the economy, the war or the environment. It seems for every step forward the Obama administration has taken two steps back.
Before you agree to wholeheartedly embrace this rumbling disaster, take note that Obama’s failures, even if they extend just another three years, are the nation’s failures and there will be consequences thrust upon us all.
Meanwhile Obama’s approval ratings continue to tank. At the crucial 100-day mark of his presidency in April 2009, 63 percent of those polled believed the President had accomplished a “great deal.” His overall approval rating, according to Real Clear Politics’ RCP Average, now stands at 49.6 percent, with 44.9 percent saying they disapprove.
With confidence in the leadership evaporating, the economy is gingerly perched on a precipice. At the same time the stock market has lost its upward momentum and could be susceptible to another crash.
“Despite the rebound of the stock market and the return to huge bonuses on Wall Street, most Americans remain mired in debt and millions of them are living in depression-like conditions,” says The Star.com. “The economy has come back far enough to reassure the wealthy and the corporate elites that things ought to return to pre-crash ways and that there is no need for radical measures of the kind they were prepared to accept during the great bailouts a year ago.”
The economy is so weak that one adult in eight and one child in four needs food stamps. Wall Street has so far ignored the three-legged table that is our economy, but perhaps not much longer.
Bear Still on the Prowl
In January the Federal Reserve reported that commercial real estate losses could reach 45 percent this year. The result of this is $1.5 trillion in commercial loans that could default.
It gets worse. Option adjustable rate mortgages have a gun at their head, with $29 billion recast higher at the end of 2009, followed by another $67 billion in 2010. Barclays Capital announced, “We expect 81% of the option ARMs originated in 2007 to default.”
If you want to know how fast this will sink Big Board stocks ask yourself this—how long does it take a gaggle of money managers to say, “Titanic?”
To date Wall Street is bragging about corporate earnings that “are not as bad as expected” and my favorite, “lower than expected” inflation. Whatever happened to the days of Ronald Reagan and Paul Volcker when any inflation was bad? That inflation could be worse is like your doctor telling you that your cancer is spreading, but cheer up… it’s not spreading as fast as he anticipated.
The Obama administration has been very good at only two things: expanding the breadth of the federal government and increasing the amount of dollars.
“What we don’t know yet is… whether we have big government or small government; they’re more interested in whether we have a smart, effective government,” said the President just before his inauguration.
So far so bad says the January/February issue of The Atlantic in its cover story. “A business organization as inflexible at the U.S. Congress would have a major Whale Oil Division; a military unit would be mainly fusiliers and cavalry,” decries the magazine, adding, “The American tragedy of the early 21st Century; a vital and self-renewing culture that attracts the world’s talent; and a governing system that increasingly looks like a joke.”
Part of the problem for the Democrats is that they subscribe to the dogma of Franklin Delano Roosevelt, that big government can dictate prosperity. What they will learn instead is that more money in and of itself is not more wealth.
Rome’s Spectacular Rise and Inflationary Fall
The god emperors of Rome constructed their empire by implementing hard money. It financed the greatest realm the world had ever experienced.
The hard money was paid out to its armies which in turn conquered most of the ancient world. Jack Weatherford explains in his book, The History of Money, “Rome’s fame and glory came from the military and from conquest, and their riches, too, derived much more from the achievements of the army than from those of the merchants.”
As long as Rome’s legions conquered new lands, the empire thrived. But each new occupation required ever greater resources. Around 130 B.C., Rome occupied the kingdom of Pergamum. In a few years, Rome’s spending doubled from 25 million denarri (a Roman silver coin) to 50 million.
By 63 B.C., the budget grew to 75 million denarri, and spending was beginning to spin out of control. Vast strategic ambitions and social expenditures were beginning to mount.
When Augustus siezed the throne Rome was at its apex, spending rose to an astonishing 250 million denarri or 10 times what it had been 60 years earlier.
By the time the Empire had conquered Europe the cost of its army vastly exceeded the treasure it was repatriating.
Yet spending continued to climb even as revenues declined. Sound familiar?
A string of emperors grasped at an immediate solution. They began to re-mint new money with less and less silver in it.
To pay for the rebuilding of Rome after it burned Nero reduced the silver content in the denarri by a whopping 90 percent! Before long confidence in Roman money began to collapse. Eventually the Empire imploded, crushed beneath its weighty ambitions, with a mountain of debt and a debased currency.
The New Romans
President Obama and the Federal Reserve have a much easier time of opting for inflation than Nero did. Our leaders don’t have to re-mint debased coins or even overwork printing presses. Instead they can create money out of thin air with a keystroke.
Last summer the Wall Street Journal wrote that the U.S. government has been, “flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear… The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.”
The problem is that the Obama/Bernanke bull can’t last. The creation of money is a zero sum game and alone it does not revive a fundamentally weak economy. And unless the economy itself improves—beginning with greater confidence in the dollar—the stock market is bound for a serious fall.
Yours for real wealth and good health,
Myers’ Energy and Gold Report